Katy Perry Shows How The Problem With The Major Labels Is Economics, Not Piracy

from the there's-a-lot-of-inefficiency dept

A few weeks back, the folks at Planet Money tried to break down the economics of Katy Perry's massively successful album with its five hit singles. Specifically, they wanted to figure out how much money her label made from such a big success. What comes out is a step-by-step description of the massive inefficiencies of the major label recording system. There are things like paying producers $100,000 per song they produce on the album. Then there's all the payola... er "special promotions" to get the songs played on radio so much. In the end, Planet Money calculates that Perry's label, EMI, probably made somewhere around $8 million in profit from Perry's music sales in the US. That's not topline revenue, but bottomline profit. That's not bad per se, but for an album with five hit singles and which was clearly one of the most successful albums in 2011, you begin to see why the labels are struggling.

But, of course, Perry, herself isn't struggling. As the full podcast by Planet Money notes, Perry has been able to avoid getting sucked into a "360" deal where the label gets to take some of all the revenue she earns. They just get the record sales. Perry, in the meantime, is estimated to have made $44 million in 2011 -- a large chunk of that coming from her tour, which alone grossed over $50 million.

What you begin to realize as you see more and more stories like this is, once again, the "problem" has nothing to do with the "music industry" failing... or even that musicians aren't able to make money any more. It's all about the bad economics of the record labels. They set themselves up to fail this way, focusing solely on that one slice of the pie, and not moving very quickly to adapt when the market shifts. Instead, they seem to have kept up the inefficiencies associated with making such a "hit" album, without figuring out a way to profit from the results. Of course, for artists like Perry, things are great. She's able to make a ton of money, most of which doesn't first have to filter through the label...

It was neat to read about the absolutely dysfunctional relationship between the labels and radio.
On the 1 hand they "pay" them massive amounts to make their music popular, and on the other hand they have been trying to extract even more payments out of the stations... for promoting them...

At some point it would be nice if someone came along and disrupted this old style model with something new and useful. For all of his faults, Kim Dotcom had a ground breaking idea in how to connect with the fans and sell to them without worrying about having to make a Superstar happen. Now it most likely was just building on the other models out there being used, but with Mega backing it you got free publicity raining down on ya.

Economics of copying

The problem is that they are structured around the old economics of copying.
In the old days it was preferable to make many copies of one thing rather than a few copies each of many things. That had two major consequences:

1) There was no real competitve pressure on the cost of creating the original - since that was amortised across a large number of copies. Hence the $100,000 production fees.

2) Any expenditure on marketing could easily be justified if it resulted increased sales - because the cost would be spread across those sales.

The record industry need to realise that this has now all changed. Because the cost of copying is now the same - regardless of whether you make one copy or a billion there is now no part of the process that is exempt from market forces.

The number of titles available in future will now reflect the market (ie the tastes of the audience) rather than the technological imperatives of the production process.

In this environment high fixed costs cannot survive.

Note that none of this logic "requires piracy" to work. It would be true even with no piracy at all and yet those who embrace the logic of it will have much less of a problem with piracy than those who don't.

:)

The old business model of fronting extraneous amounts of cash to artists and putting all the risk on their shoulders to become successful is aging fast. They're afraid not of file-sharing per se but rather the end of their role as intermediator between the artist and the public. If they're so deathly afraid that "amateurs" are going to harm your method of business by allowing people to freely share their music and spread the word, they don't deserve to call themselves professionals. After all, if they're "professionals," there should be a noticeable distinction in quality between their 'for profit only' music and the so-called amateurs'. Funny thing is, the distinction between them is shrinking all the time. More and more I'm coming across independent artists who sound every bit as good as anything the major labels have to offer.

Re: :)

All too true. Over the past few years, the "professional amateur" has risen. I don't watch shows made for TV broadcast all that often (am watching Battlestar Galactica on Blu-ray at the moment), but what I eagerly anticipate these days...is the Youtube scene.
I'm talking about shows like EpicMealTime. Philip de Franco. LittleKuriboh. The abridging community. ThatGuyWithTheGlasses. Yahtzee. RedLetterMedia. As soon as I fire up my browser and see either an email or an indication on my Youtube channel that they've uploaded a new video, I HAVE to see it. And its free. Their shows are getting better all the time. Take Yahtzee for example. His earliest reviews weren't that great, but he gradually increased the quality, built up a following and published a book (I bought a copy...yes, me, the guy who has a Kindle and prefers to download all my books for free). These are people who just use a desktop computer at home (no need for high-end studio workstations. Therefore, they feel like, and rightly can be called, 'one of us'. I feel a connection to them. They're not some fake personality built up and edited and marketed by a corporation, its themselves being themselves, which feels completely real.

Anonymous Coward...."Apple makes 30 cents (per song download) for not doing much"? If it wasn't for Apple you'd be paying a fortune to purchase entire cd's rather than just downloading your favorites, and you'd still be stuck listening to the music at home or on bulky players...that is unless you're still illegally downloading them and screwing the artists and record companies.

Apple made it inexpensive and easy to listen and live music...which everyone benefits from. I didn't see the record labels helping you.

Thank Apple and Steve Jobs for enhancing your life and keeping money in your pocket. And let's ask why the record cos were so stupid not to have the vision to do it on their own. Whatever happens to them is their own fault for bein asleep at the wheel

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Well in Apples favor they didn't let the labels get a single finger into it.

Hulu - Dying.
NetFlix - poisoned.
Napster - joke.

Everytime the labels get a chance to demand something from a platform they destroy it.
Apple is big enough to hold them off, and they remain successful. (Not that apple doesn't have their own issues but those seem to pale in comparison.)

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Not to mention the work on creating and maintaining usable software, the hardware that encourages people to use Apple's ecosystem, support functions, the legal minefield involved in contracts and licencing the product to begin with, the design that makes their product more attractive than cheaper competitors, etc., etc...

But, yeah, "not doing much". If it were really so easy to create that platform, the RIAA would be taking that 30 cents for themselves in a heartbeat.

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While I'm not familiar with those particular shows you mentioned, I wholeheartedly agree with your sentiment. We no longer need to rely upon the biased filter of the mega media conglomerates. They're fast becoming irrelevant. There are hundreds of channels on TV and hardly anything worth watching, and in the few instances where there are, it's often hampered by 5+ minute commercial breaks and pop-up ads during the show/film nobody cares about. Ditto for radio -- I'd much rather listen to my own music than hear the same payola pre-programmed nonsense on repeat ad nausea. (For example, classic rock stations. How many more times do we really need to hear friggin' Crocodile Rock?)

Let's face it, copyright expansionism is really just a way of obfuscating big media's attempt to take control of the internet. They fear a free market where people are able to create, share and disseminate knowledge without the big media looming over their shoulders regulating everything. The music industry is afraid of the independent musician so much so that they're attempting to create an excusive society with their .music nonsense wherein only the artists they recognize as "professional musicians" are represented as such, i.e. those under their umbrella. Not long ago, ASCAP came out with a smear campaign against Creative Commons, EFF and other public-friendly copyright organizations. Licenses such as CC allow artists to freely distribute work for non-commercial use while still providing many of the same protections as a standard copyright, such as royalties for commercial use, but that wasn't good enough for ASCAP. No, they had to set up a strawman and knock it down to make their point. Typical corporate bullying. Too bad that the internet is not their corporate playground to go around dictating what everybody is allowed to do. Let 'em have their stupid TV and radio.

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The best part of all of this is the fact that Apple makes 30 cents for not doing much. Quite the racket that Steve Jobs created.

Do you really think Apple became one of the most successful companies ever, and restructured the media consumption habits of the whole world, by doing nothing much?

The iTunes store (which in itself involves hefty servers, ongoing development, considerable administration and a large promotions budget) is only one slice of the pie, and would be nothing by itself. Its success - and the success of the labels and musicians that use it - is owed to the sprawling media ecosystem Apple created.

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One of the biggest mistakes the legacy industry is making is in ignoring the movement you describe - except inasmuch as they see it as a place to mine talent, plucking people out to turn them into "real" entertainers.

How long before those people start saying no? How many already have?

The funniest part is, the industry is going to get its wish pretty soon: their content is going to get pirated way less. But their going to be horrified when they realize that it's not because people started paying, but because they have found far superior alternatives. As Jay says, it's poetic.

There's an important point hidden in their expenses. The whole 'producer' concept is the key to understanding the label mindset.

Musicians make music. Producers make product, which is how the Labels view their wares. Once the promotions department is finished with it, it's a tightly controlled packaging of the artist's intention, using the closed feedback loop of chart numbers as an infinitely recursive mass focus group.

They still think in terms of physical objects: their entire philosophy, and their entire workflow is based around solid lumps of plastic and the vending thereof.

They don't know how to change, because all they know is 'product'. 'Product' isn't what's selling.

I still have one of the first consumer MP3 players, tucked away in a drawer, a Diamond RIO PMP300. I bought it in late 1998, used, at a local computer flea market. The first Ipods didn't appear until 2001. The music industry tried VERY hard to eliminate the RIO and fortunately they failed. Apple did make a lot of changes and improvements by building on the RIO's 'prior art'. Many companies did, and now there are a lot of very good MP3 players that are every bit as good as the IPOD, but for half the price.

Apple didn't invent easy online distribution either. they built upon the success of Napster. Also AllofMP3 was a better and even more popular service than Itunes. They had a better pricing structure, more choices of songs and artists, choice of sound quality and no DRM. AllofMP3 also PAID THE PROPER ROYALTIES to the extorti ... ahem .. collection society in their country and was a completely legal service. They were shuttered anyway.

Apple is a company that has been built almost entirely on the 'prior art' and ideas of others, and uses it's success to try to ensure that others are not able to do the same.

It was 'easy to listen and live music' well before Apple came into the market, and the competition has always been less expensive.

I do agree though that whatever happens to the record companies is their own fault for not seeing the money that was there for the taking. They are idiots.

" that is unless you're still illegally downloading them and screwing the artists and record companies. "

It has been proven that downloading doesn't affect sales one teensy little bit. Downloading has never hurt artists or labels, they know it.
No one has screwed the artists more than the labels have, and they know it. I think you do too.

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There's still Amazon.com's MP3 Music Store. I've not heard anything bad happening to them. The fact that we get DRM-free, high-quality, 256-bit (average) variable bit-rate MP3 files that I've seen spikes to full 320-bit is absolutely great.

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"I've not heard anything bad happening to them"

Well, they still aren't allowed to sell MP3s to every country where they have a store, let alone other countries in the world, so there's that... At least Apple are able to sell to a large proportion of the potential customers in the world.

" Well, they still aren't allowed to sell MP3s to every country where they have a store, let alone other countries in the world, so there's that... At least Apple are able to sell to a large proportion of the potential customers in the world. "

I would say this underscores what's WRONG with the system, not how great Apple is. Artificial scarcity is a bad thing. You know as well as I this pushes those who would buy to finding alternate means of acquiring what they want. There is no such thing as artificial scarcity on the internet, and there isn't any way of forcing it to exist. Your own statement suggests that Apple STILL can't reach the whole world. If it did, THAT might bring back paying customers.

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Indeed. I was simply noting that iTunes is available in many more countries (about 120 looking at the country list in the app) than Amazon (where MP3s aren't even available in all 8 countries where they have an official site). If the labels had any sense, they'd have spent the last decade streamlining their licencing and distribution, not trying to enforce further artificial restrictions.

Whether or not the reason for iTunes' wider reach is better management on Apple's part, it shouldn't take a genius to see how lack of choice will negatively affect legal purchasing decisions. After all, no pirate has ever been told their chosen download is unavailable in their current location.

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I prefer to pay for music. not go to The Pirate Bay.

I don't use iTunes and anything that can be labeled as "iShit" but I do use Amazon.com's MP3 Music Store.

When I go there and get a song I get a DRM-free, high-quality, 256-bit (average) variable bit-rate MP3 file that I've seen spikes to full 320-bit. This isn't some badly encoded MP3 which believe you me, I've heard some badly encoded MP3s that was encoded by someone who obviously doesn't know his way around LAME.

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They set themselves up to fail this way, focusing solely on that one slice of the pie

Of course. You think they'd let the MPAA come out with a list of the only 3 profitable movies ever and do nothing of the sort themselves? How do you expect them to cry for new "laws" and "agreements" if no one is eating their pie?

Like an adwords

As a web developer this sounds like an Adwords advertiser(the label) has no idea how to market exactly and just chooses a bunch of keyword in hoping they will work. They then do not follow their progress possibly spending valuable profits on useless expensive keyword(areas) resulting in their massive losses which they then blame on piracy. The blame game *shakes head*

I think saying there are inefficiencies in the recording industry is a little like calling a hurricane a breeze. $100,000 a song, and they're doing what exactly? This seems to be a case of hyper specialized job roles that force any business to eventually fall. Their business is no longer going to be able to float leech positions that recieve large pay for little to no work. Saying you employ 50 people for one task when the actual work only requires 5 people consistantly working 40/hrs a week is simply a stupid way to run a business. The only tragedy is that it made it to that point in the first place by screwing over either consumers or the artists they use. It sure seems like the next time the RIAA throws out the "We employ _____ people!" card, someone needs to ask them why they can't do the same for less? I'm sorry I'm not going to feel bad for the big record producer losing his job because, well, he actually offer any benefit to the company.

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360 deals

This is precisely why 360 deals are becoming more common at all levels in the music industry. Quite frankly, if you want to go the major label route, the 360 deal seems to me like the most equitable deal for all parties (subject to good faith negotiation on percentages and so on).

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Ah, usual AC tactics. Can't attack the data or the conclusions Mike comes to, but can't bear to read an article/headline without some form of attack? Attack trivial points that have no bearing on the central point of the discussion.

Even at your lowest estimate (which appears to be a complete guess you dragged out of your ass anyway), the tour would still be netting more than the album. That doesn't change anything raised in the article.

Name other economic sectors who have not had to streamline their operations or cut costs to remain viable though these tough economic times?

Think about it. Everyone else is struggling. From state and local governments cutting police, firefighters & teachers to large multinational corporations like GM or Chrysler laying off thousands people and borrowing billions of dollars to survive.

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Already Happening

It is already happening in the tech sector.

Where do you get tech news, NY Times or The Verge? Sure some big tech news sites are owned by media conglomerates but that is mostly from acquisition and there are plenty of blogs that aren't selling out.

If you look at broadcast/TV/live news coverage of the tech sector which is better, CNN and G4 or TWiT.tv and Revision3?

It is only a matter of time until some one gets as successful as TWiT.tv doing comedy or drama or regular news. That is when the existing media companies will start to really feel it, when solid, high production value but extremely cheap to produce content stops being something that they can pass off as "interesting only to nerds."

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DRM free, yes. High quality, not so much. Not bad, but not CD quality. Don't get me wrong, I use iTunes and do download stuff, but I do not expect, or get, CD quality download from Apple. It is AAC, I can find no better option from iTunes (if there is, please let me know). And yes, I have done the A/B comparisons.

Re: 360 deals

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Oh Paul, why don't you comment on the usual Masnick tactics? Putting two unrelated numbers side by side, and trying to imply a relationship.

Further, the Forbes numbers don't show gross or net, no indications. It doesn't at all give any indication of the sources of income for Katy Perry. However, it does specifically mention that Taylor Swift made money off of album sales (and it was the first item on their list).

It should also be noted that Katy Perry is actually a song writer, credited on nearly every song on her albums. No doubt the strong radio play and other uses of the material under license are a big deal.

She also made 4 million dollars as the face of Proactive.

"Perry's album Teenage Dream, released in August, boasted four chart-topping singles making it one of only nine albums to accomplish that feat in the Billboard Hot 100's 52-year history. No stranger to business, Perry shills for Proactiv, Adidas and Ubisoft, and has her own perfume line, Purr."

I think that Mike just isn't being honest here. Yes, both numbers are correct, but the 44 million seems to be mostly a direct result of the albums, and the promotion and exposure that have come with them. Shouldn't we consider HOW it happened, rather than just tossing a number up there?

"Even at your lowest estimate (which appears to be a complete guess you dragged out of your ass anyway), the tour would still be netting more than the album. "

Incorrent. The album sales (5.5 million) combines with the radio plays and other licensed uses, and generates significant income for Perry. The tour, well, Gross versus net, and then net to artist... It's not clear, and Mike certainly isn't bringing anything to the table to explain it.

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Apple didn't invent the MP3. There were alternatives to "bulky players" before the Ipod. Take about thirty seconds to release Steve Job's cock from that deathgrip your mouth has on it. The guy was a shithead, who took other people's ideas and "tweaked" them. he didn't invent or innovate anything. Are some of the things he (or, more likely, the people working under him while he was in control of Apple) cool and interesting? For sure. The Ipod didn't invent MP3 listening, but it did innovate it. But that doesn't change the fact that Steve Jobs "invented" virtually nothing, but simply used existing ideas and made them better. Which, ironically enough, is what he attempted to sue Android makers of before his death.

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So what is your point exactly? You're admitting Mike's numbers are correct. He didn't say she's not making money from album sales. Is your complaint that he put "netted $44 million" and "grossed $50 million from her tour" in the same sentence?

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The '360' deal was created by the major labels to get their paws on tour money that in the past had gone to the artists. It's just another way for the labels to take another piece from the artists under the guise providing artist development.

Re: The best part of all of this is the fact that Apple makes 30 cents for not doing much. Quite the racket that Steve Jobs created.

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If Apple have been so successful at "not doing much", why haven't the record labels done the same? If setting up the world's more popular source of legal digital music is so easy, why aren't they directly competing? Clearly the negligible cost to develop, operate and market such a service (i.e. "not doing much") should make this an easy decision, and a great way for the labels to prevent the music industry from dying, which we all know is happening...

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When I get through the 300 movies in my streaming queue I'll let you know if Netflix is poisoned or not. It'll probably take me about two or three years, unless they add more content in the meantime, in which case it could be forever.

Netflix has never been the place to go get the newest of the new. It's been the place to wallow in the best of the old. Their strength was having the biggest library of DVDs-by-mail, and streaming just complements that with the ability to check out 10-15 minutes of movies and decide what's worth watching.

I could care less how long things take to get to Netflix. There's always something else to watch in the meantime. Maybe that hurts Hollywood trying to push their latest crap on us, but Netflix has been the one thing that's kept me from turning pirate.

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No, I am saying that closely linking those two numbers is there to imply that the gross of the concert tour is somehow the biggest driver in her income, which is not true.

Rather, it's the careful promotion of her name, brand and personality, orchestrated between her management company, publicist, and yes, RECORD LABEL. All of the things that have brought her a lot of money in the last year are on the basis of that. The concert tour is the result of these things, not the cause.

As I noted, a 50 million gross doesn't indicate very much as to what the artist really made. That gross number is actual take at the door, not net of anything. There is no indication of Ms Perry's personal stake in the tour, it's income, etc. Without some indication, there is no reason to pair these two numbers up in a manner that links them. It would be way more relevant to post up a list of sponsorships and spokesperson gigs, as they made much more.

What would Mike do it this way? He is trying to push the notion that live concerts are "where it's at" for making money. He doesn't like to deal with cause and effect (ie, the album, the record label investment, the promotion etc as the cause, the tour as the effect). He would rather cherry pick something, put two non-related numbers together, and try to drive a story.

Why mention a net number to her in one breath, and a gross number to a touring company in the next, unless you are trying to imply that they net is the effective of the gross.

With 5.5 millions records sold and untold numbers of radio play and licensing, it is much more likely that Ms Perry netted more off of her recorded music than her tour, on a personal level.

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"Producers make product" Though I agree with your overarching sentiments your statement seems to illustrate a lack of knowledge about what a producer is and does. Music production is as artistic as music performance and with additional technical elements that take training and years to master. Check out Miles Davis' Bitches Brew for an example.

Overpaid

An industry that can afford to buy and sell congressmen is not an industry that is "failing". The fact is, they have been to successful. It's past time to regulate the entertainment industries. It's past time that the artists got a bigger cut, some of the middlemen are cut out, and at the same time prices are slashed.

Black March should become a lifetime thing. Boycott the labels, and support the artists directly. Buy independent music, buy from labels that oppose ACTA and TPP.

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"Incorrent."

Where are your figures, or am I just means to accept the figures you dragged out of your ass without question? You really don't convince anyone by just whining that Mike is wrong, while neither address the central points of the articles, nor citing your own figures.

Seriously, start applying your own irrational hatred to the opposition you support, you might understand the real discussion.

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All those assertions, yet not a link or study to back them up. I'll ask again: why should we simply accept the word of a troll who has never identified himself or his credentials in any way? Why do you expect people to believe you over someone who cites his own credentials, opinions and data in his own name?

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She is selling the scarcities CREATED by the albums... you know, exposure, promotion, etc.

She doesn't sell exposure. She doesn't sell promotion. She benefits from those in order to sell other things. And if your point is that her album sales help her both directly and indirectly, well nobody is disagreeing with you.

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Regarding iTunes, most "experts" believe Apple just breaks even on the iTunes site, but may make as much as $100 per iPod/iPhone. So that's how Apple makes its money. 90% of what iTunes collects go to the recording companies. Oh, and to get Universal Music to agree to license its songs, Apple had to give it a royalty on each iPod sold (which the other labels also received through a mutual benefit clause). Apple is basically doing the record labels a favor!

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I have never worked with any of the business units at Apple, so I have no insight into their inner workings. Likewise, I have never worked with its senior-most executives, so likewise I have no insight into what the do/did when it comes to ideas they learn about from third parties outside of Apple.

I have, however, worked with numerous companies who, like Apple, are always on the lookout for fresh, new ideas that hold future promise. What is important here is the term "ideas", because an idea is certainly not the same thing as an implementation of an idea, and it is the means by which an idea is implemented that begins to define what comprises an invention.

It is said that one of several ideas embraced by Mr. Jobs was the idea of a GUI he is attributed as having observed at Xerox's PARC facility. To say he "stole" an idea freely shown to him would not in my view be accurate. Rather, I would say he saw something of interest, the GUI, and then took that idea back to Apple to work on it and figure out a way to make it work with Apple's upcoming products, which at the time were the Apple IIGS and the real game changer, the Macintosh. Through such work Apple quite clearly came up with a number of inventions, and the rest is GUI history.

Merely as an aside, I have always been taken aback by the many persons who insist on somehow equating Apple with Microsoft. Apple is, and always has been, a hardware company, whereas Microsoft has, but for dabbling with some hardware accessories, been a software company. Apple's work with software has in my view always been related to using it as a marketing tool for the sale of its hardware. Even now, its software products are priced well below equivalent products by others, in my mind confirming that its software is basically a "foot in the door" to entice people into purchasing its hardware.

Given its hardware bent, it does seem quite reasonable to assume that services such as iTunes are once again a means by which it can promote its sale of hardware. Based upon unit sales, stock price, market share, etc. its spproach seems to be working quite nicely.

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Perhaps the answer can be found in the fact the Apple sells hardware, and anything that can materially and beneficially increase such sales is worth pursuing, even though at times it may very well serve as something akin to a loss-leader.

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IOW, the labels helped put her in the public eye, and then while the labels were pursuing sales of the music prepared with its investment capital and services, she used the "fame" so garnered to strike out in those areas that labels have historically eschewed. Sounds like a rather beneficial symbiotic arrangement.

Producer make music, not labels

You don't seem to understand much about the business. The producer makes the recording and ownes the master. The producer should get ALL revenue from sales if the label did not buy the master from them. Paying 100 000 per song to earn 8 million is a good deal for them. The producer always get a royalty aswell, usually 4%. So how much they get depends on sales. The producer is usually not interested in ownership. So they sell the master and move on to produce a new album. This is not strange at all. Different people have different roles in the industry.